Estate tax law changes have created uncertainty for many families who put estate plans in place under a different set of rules. The federal estate tax exemption, which determines how much a person can pass to heirs free of federal estate tax, has shifted significantly in recent years and is scheduled to change again in the near future. Understanding what the current rules say, and where they may be heading, helps families determine whether an existing plan still achieves what it was designed to do.
What the Current Estate Tax Exemption Means for Families
The federal estate tax exemption sets a threshold below which an estate is not subject to federal estate tax. For deaths occurring in recent years, the exemption has been at historically high levels following changes made by the Tax Cuts and Jobs Act. Under current law, however, these elevated exemptions are scheduled to sunset, meaning they will drop significantly unless Congress acts to extend or modify them. The precise amount of the exemption at any given time is a fact that changes with legislation, and families with larger estates should verify the current figure with a qualified advisor rather than relying on figures that may no longer be accurate.
For most families, the federal estate tax is not a primary concern because estates below the exemption threshold are not subject to it. However, estate tax law changes affect planning strategies even for families whose estates currently fall below the threshold, particularly those whose assets may grow over time or who live in states with lower state-level estate tax exemptions.
How State Estate Taxes Add a Layer Many Families Miss
Many families focus exclusively on the federal estate tax and overlook the fact that a number of states impose their own estate or inheritance taxes with significantly lower exemption thresholds. A family whose estate falls well below the federal exemption may still face state-level estate tax exposure depending on where they live. State estate tax rules vary considerably, and estate tax law changes at the federal level do not automatically affect state rules. Families who moved to a new state after putting an estate plan in place should confirm whether that state’s tax rules require any adjustments to the plan.
As outlined in IRS guidance on estate and gift taxes, the federal estate tax, the gift tax, and the generation-skipping transfer tax are related but distinct, and changes to one can affect planning strategies that involve the others. A plan designed around a particular exemption level may not function as intended if that exemption has since changed.
What to Review in an Existing Estate Plan After Tax Law Changes
Estate tax law changes create a specific set of things worth reviewing in an existing plan. First, formula clauses in wills and trusts often reference the applicable exclusion amount or make distributions tied to the exemption level. If the exemption has changed significantly since a plan was drafted, these clauses may produce unintended results. Second, plans that use credit shelter trusts or bypass trusts were commonly structured around older exemption levels. A plan built around a much lower exemption may now be more complex than necessary, or may not be capturing planning opportunities created by the higher current exemptions while they remain available.
As covered in True Estate Planning’s overview of estate planning basics, reviewing an estate plan after major legislative changes is a standard part of keeping a plan current. Estate tax law changes are among the most significant triggers for that kind of review.
Key Questions to Consider After Estate Tax Law Changes
Several questions are worth working through when reviewing an estate plan in light of estate tax law changes. Does the plan contain formula clauses that reference the exemption amount, and if so, would those clauses produce the intended result under current law? Is the estate likely to approach the current exemption threshold, either now or in the future? Does the family live in a state with its own estate tax, and has that been factored into the plan? When was the plan last reviewed by an attorney, and have there been significant law changes since that review?
Estate tax law changes are not the only reason to review an estate plan, but they are a significant one. A plan that worked well under one set of rules may need adjustment as the rules evolve.
Summary
Estate tax law changes affect the exemption thresholds that determine how much can pass free of federal estate tax, and scheduled sunsets under current law mean further changes are possible. Many families also face state-level estate taxes with lower exemptions that operate independently of federal rules. Existing estate plans that contain formula clauses or credit shelter trusts may produce unintended results if they were drafted under significantly different exemption levels. Reviewing an estate plan after major estate tax law changes is a practical step to ensure the plan still reflects both the law and the family’s intentions.
Estate tax planning involves federal and state rules that change over time and vary significantly by circumstance. If there are questions about estate tax law changes and how they may affect an existing plan in general, the team at True Estate Planning is available to discuss the options.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between True Estate Planning and the reader.
